Playboy’s focus centers on outsourcing, shrinking

The March issue of Playboy still features the old-style centerfold that made the magazine famous during its heyday long ago, but in a slightly smaller print format.

Now the parent company is shrinking too.

Under a chief executive determined to remake its faltering business model, Playboy Enterprises Inc. has launched a fast-paced program to outsource much of its operations.

Since his appointment in June, new boss Scott Flanders has reached two major agreements that shift basic functions to outsiders with greater scale and expertise.

At least two more major partnership, joint-venture or licensing deals will follow in the coming year, making Playboy more profitable but, like its centerfold, "smaller and leaner," Flanders said.

How much smaller?

Potentially small enough to hide behind a staple.

In a year, he said, the Chicago-based media conglomerate could cut its headcount of 573 employees by half as partners take over its existing operations and expand into new ventures.

Already, Flanders has outsourced production of the flagship magazine, and he's counting on big results from his recent deal with IMG Licensing Worldwide to take over the company's operations in Asia, he said. Playboy will be "open-minded" about expanding the IMG relationship into Europe as well, he added.

Playboy also will proceed with plans to open "four or five" additional entertainment venues with partners by year-end, including a casino in Mexico and a nightclub in Miami, he said.

Its television operations, which include the Spice Network and Playboy TV, cry out for a much stronger partner to take the lead, Flanders noted.

"There's no aspect of the business that I'm more focused on than TV," he said. "Size matters."

The "real question" isn't how much Playboy might outsource, but rather "how much of it are they going to keep?" asked David Bank, an analyst at RBC Capital Markets.

As it stands, Playboy does a little bit of everything but not much especially well. It has built a brand recognized around the world and excelled at public relations, business development and trademark and contract law.

But its operations rarely have produced consistent returns. A recent licensing deal with beauty-products manufacturer Coty Inc. probably will deliver more to Playboy's bottom line than video-on-demand, a core business developed internally that made big money for a while, then faded.

Wall Street generally has voiced support for Flanders' strategy. Lacking the capital to make the most of its brand, "The next best thing is to farm it out," said Steve Marascia, research analyst at Capitol Securities Management Inc. "This is probably the only viable option."

But Flanders will need to move quickly and strike the right deals, noted RBC's Bank.

"They've begun to accelerate the urgency and they've broadened the products," he said. "You want to see a little bit more before you get bullish."

Playboy shares took off at the end of last year amid speculation that the company would be sold. Once takeover talk died down, "It has, for all intents and purposes, been left for dead," said Robert Chapman Jr. of Chapman Capital LLC, which recently owned a 2 percent stake in Playboy Class B shares.

If the right partners take the brand and run with it, the stock could soar from its current $3.27 per share, Chapman said.

"There's an awful lot of upside that comes from low expectations," he said. "It's like a million-dollar lottery ticket that somebody is willing to sell you for $3."